CLP Group

Just assume HK Electric cares more about the environment

PUBLISHED : Thursday, 03 January, 2008, 12:00am
UPDATED : Thursday, 03 January, 2008, 12:00am

'We used to turn on all the lights; now we leave only half of them on. Turning on the lights is like advertising the company ... with less advertising I expect fewer customers.'

Lamp shop proprietor,

SCMP, December 22

Iwas in Causeway Bay on New Year's Eve. Fool thing to do, I know, but I survived and the one impression I carried back was not so much awe of the crowds as of the lighting on Windsor House, right across the street from Victoria Park.

The exterior of the building's podium consists of advertising display alone, lit from above by banks of eye-searing floodlights so fiercely bright as to make you think the Second Coming had just been announced or, at least that noon is perpetual on Great George Street.

How long will it take us to treat this sort of thing as a thermal crime?

The purpose of the display, I assume, was exactly the same as that of the lamp shop proprietor I quoted above. Bright lights attract customers and you will get more customers than the next fellow if your shop's lights are brighter than his.

This simple logic, of course, ignores the fact that the other fellow is likely to realise it as well and will in turn install brighter lights, which will force you to make yours even brighter, which will induce him to top you again and so on until you both beggar yourselves on electricity bills with no net increase in customers between you.

There is a good way to stop this circular pursuit, however. It is for the electric utility to raise its tariffs to the point that both of you realise it is madness to compete this way. You will then settle on some less thermally criminal form of competition.

And I should now like to congratulate the Hongkong Electric Company for having taken the initiative in this matter by raising its electricity tariffs to such an extent as to reduce wasteful electricity consumption.

I must assume that it is this environmental motive which underlies its recent announcement of a 6 per cent increase in its average tariff because, as the chart makes evident, that tariff is now 40 per cent greater than the average tariff charged by CLP Power, its counterpart in Kowloon and the New Territories.

Yes, that's right, in percentage terms forty, 40, the numeral four followed by the numeral zero before the decimal.

Astounding, isn't it? Where CLP is this year to charge its customers 91.1 cents per kilowatt hour, Hongkong Electric's tariff will be 127.4 cents. You may wonder why there are any lamp shops at all left on Hong Kong Island.

The thing to bear in mind about this is that in financial terms the two companies are otherwise very much alike. In both cases a scheme of control limits annual earnings to 13.5 per cent of investment in fixed assets with further identical provisions that affect the choice of debt or equity financing.

But Hongkong Electric consistently makes 50 per cent more dollar investment in fixed assets than CLP for the same installed generating capacity and 75 per cent more dollar investment for every unit of electricity sold. These are big margins of excess cost.

If you were to adopt the cynical view you might make something of the evident fact that the more the company pours into fixed asset investment the higher its permissible earnings go, which undoubtedly pleases the shareholders.

The difference certainly cannot be attributed to economies of scale. Hongkong Electric is smaller than CLP but not that much smaller and the two companies operate on roughly similar ratios of excess capacity over maximum demand.

CLP's distribution network, however, extends over almost 10 times as much area as Hongkong Electric's, which you would ordinarily expect to make CLP's costs greater. Yet things are the other way round.

And when Hongkong Electric says a tariff increase was necessary because of the rising price of coal, you have to ask why the company has then been so much slower than CLP in diversifying its fuel sources to gas.

But the difference between the two in tariffs is not attributable to the cost of coal. CLP's plants are also still predominantly coal-fired. The big difference lies in the fact that Hongkong Electric makes much more dollar investment than CLP does for the same output of electricity and this is a puzzle indeed.

Let us be kind, however, and attribute the huge discrepancy to a greater concern for the environment on the part of Hongkong Electric. Let us postulate that the company is pushing its permissible tariffs up in order to deter thermal criminals.